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Precious metals

The latest podcast guest for Mike Gleason* at Money Metals Exchange is Dr. Marc Faber whose financial predictions are always of strong interest to the investment community everywhere.

Mike Gleason: Coming up we’ll hear from the one and only Marc Faber of The Gloom, Boom and Doom Report. Dr Faber has some alarming things to say about how America’s foreign policies may have disastrous implications for the U.S. and global economies, and for the dollar. He also weighs in on which asset class, crypto-currencies or precious metals, will ultimately will be the major benefactor of all of the pending geopolitical unrest. Don’t miss a tremendous interview with Dr Doom, Marc Faber, coming up after this week’s market update.

Precious metals markets suffered a big setback this week as the U.S. dollar gained strength. The dollar rose to a three-month high on interest rates and upbeat economic data, including strong durable goods numbers. The dollar’s rise against the euro was also boosted by the European Central Bank’s decision Thursday to maintain its ultra-loose monetary policy.

Precious metals traders responded by hitting the sell button. Gold prices are down 1.0% on the week to bring spot prices to $1,323 an ounce as of this Friday recording. Silver currently checks in at $16.52 after falling 3.6%. Platinum is down 1.5% this week to $917, and palladium is off 4.2% to come in at $988 per ounce.

Metals markets could continue to face selling pressure if the U.S. dollar continues to rally. Dollar bulls note interest rates continue to look relatively attractive in the United States, with the European Central Bank showing no signs of trying to catch up with the Fed in raising its benchmark rate. Some currency analysts describe the dollar as the best looking house in a bad neighborhood.

Dollar bears counter that the Federal Reserve’s nominal interest rate hikes are lagging behind rising inflationary pressures. Moreover, rising deficit spending makes the U.S. fiscal house one of the worst looking in any neighborhood. The current debt to GDP ratio of close to 100% puts the United States in a danger zone.

Other countries that have seen their government’s debt balance exceed the output of their economy went on to experience political upheavals, defaults, and hyperinflations. The most notable example currently playing out is Venezuela.

The bolivar has lost more than 99% of its value since the socialist economy collapsed, sending prices up thousands of percent. The Venezuelan stock market is up some 1,600% so far this year alone. Of course, that doesn’t mean you can expect to get rich quick buying Venezuelan stocks. They are moving largely just as a side effect of inflation.

That’s easy to see in an extreme case like Venezuela. It’s less obvious when inflation is rising at a relatively low annual rate, as it has been in the United States in recent years. But over time the stock market has gotten and continues to get artificially inflated while politicians and mainstream media outlets cheer on what they want us all to believe is a true bull market.

But those who believe the Dow would be sitting at over 24,000 without the inflationary stimulus of the Fed is simply fooling themselves. A rising stock market can actually be a symptom of a systemic problem leading to a currency crisis. Investors don’t see it that way right now, which is why they aren’t running to gold in a big way. But it won’t take much for the powers that be to lose control and for investor perceptions to shift.

It’s a question of when, not if. When will the unsustainable growth in government debt reach a tipping point that sends a shock into the financial system?

The most recent omnibus budget deal virtually guarantees trillion dollar deficits going forward. President Donald Trump reluctantly signed it into law and in so doing may have sealed the dollar’s long-term fate. The Trump administration is trying to pare the spending back by a few billion dollars… certainly not enough to change the country’s fiscal trajectory… but even that likely won’t happen. GOP leaders Paul Ryan and Mitch McConnel promised Congressional Democrats they’d get all the spending they want. And that promise apparently supersedes the promise Republicans made to voters about getting spending under control.

It’s difficult to believe they will have a better opportunity to do so after this fall’s elections, when Democrats are likely to pick up seats – and quite possibly the majority in Congress. Investors would be wise to prepare for the end of the Trump rally and the ultimate inflationary consequences of bipartisan debt spending.

Well now, for a closer look at America’s politics internationally and what it all might mean for gold and silver, let’s get right to this week’s exclusive interview.

Mike Gleason: It is my privilege now to be joined by a man who needs little introduction, Marc Faber, editor of The Gloom, Boom and Doom Report. Dr. Faber has been a long-time guest on financial shows throughout the world, and is a well-known Austrian economist and investment advisor, and it’s a tremendous honor to have him on with us today.

Dr. Faber, thanks so much for joining us again, and how are you?

Marc Faber: Well, it’s my pleasure to be on your show. Thank you.

Mike Gleason: Let’s start out here with the equities Marc. Now the U.S. stock markets peaked in late January and made their lows for the year in early February. Stocks have been trading in a range since, but are currently pushing back towards those lows as volatility has certainly picked up. If you had to guess about which way the markets are likely to break from here, what would it be, and do you think we’ve seen the top for 2018 or can speculators keep pushing the markets higher for a bit longer?

Marc Faber: That’s a good question and I think everybody’s interested in the answers and everybody has a different view, but I have maintained that the January 26th high for the S&P up 2,872 was like a mirror image of the low on March 6th, 2009 when the S&P was at 666. At that time, everybody was bearish and leading strategy and I don’t want to name who, but they were predicting for the S&P to fall to 400. And what happened is that, because sentiment was so negative, and the market was so oversold, the market turned around and actually on very poor earnings, started to go up. And now, we have, in January, a high, when everybody felt that the market would go higher and what then happened is that on good earnings, stocks didn’t move up, but started to go down.

So, I think we are in a situation where it is likely, it’s not yet a hundred percent sure, in order to get a clearer picture, if a major bear market has started, we would have to make a low below the February low, but that hasn’t happened yet. But looking at the market and the market action and the momentum and the number of stock that are actually making new lows, I’d say there is a fair probability that the market will disappoint very badly.

Mike Gleason: Dr. Faber, it seems to us that the fate of precious metals markets is tied pretty closely to stock prices, at least in the near term. We lack either fear or greed to drive any trend change. Here in the U.S. there’s very little demand for safe-haven assets. If you look at sentiment in the metals markets you’ll find that the greed factor is also missing. Now that could all change if gold and silver can catch investors’ attention by significantly outperforming stocks for a while longer or if we get the long overdue correction stocks.

Now Marc, you wrote recently about two items you feel would signal a major top in the equity markets. The first had to do with the public going all-in, coupled with an excessive amount of speculation. The second would be the revelation of a major fraud. Those items will be familiar to anyone who had taken a good look at the 2008 financial crisis. Are you expecting history to repeat itself here?

Marc Faber: Well, I think there is a lot of disinformation, and usually when stocks go down, some fraud comes to the surface. And I expect it to happen, and I mean in a major way. Whether the fraud is related to some corporation, which I think is quite likely, or whether it’s related to the fraud that is going on in the pension fund system, where pension funds are grossly underfunded, and, in the future, will either have to increase contributions or reduce distributions. I think these are items that could happen. Secondly, the public may start to lose faith in the system because of the political situation. I think the political situation in the U.S. is very bad, and If you read about what has been happening at the FBI, the CIA in Washington, you have to scratch your head whether that is all possible in a system that is supposedly functioning.

It’s like Watergate, but actually magnified. So, I think there is a possibility that investing public loses interest in financial assets. You talked about precious metals. I think there has been, just recently, a huge short position in the dollar. In other words, speculators, 15 months ago, they were heavily long in the dollar, and now they are very heavily short dollar. I think the dollar may rebound and as a result, precious metals may not move up right away. I think, eventually, they’ll move up, but for the next, say, one or two months, I don’t see how precious metals would rally significantly.

Mike Gleason: Getting back to politics here for just a moment, it does appear that we may be on the verge of a global trade war. What are your thoughts on the tariffs being imposed by the Trump administration on China, and how do you envision that playing out?

Marc Faber: My view is that, actually, the Trump administration, for which, I would have voted for Mr. Trump, but he proves every day that he’s a completely clueless individual. He says one thing and then does something totally different. He changes his view all the time. And I think, quite frankly, there is a trade war which maybe won’t happen, but if there is one, the U.S. will be the big loser, because consumer prices in the U.S. will go up and that is not desirable at the present time, as the Fed is already tightening and interest rates have been rising, so what it will mean is, if there is a trade war, initially the dollar will actually rally. But this is precisely what the U.S. shouldn’t have, a very strong dollar.

Mike Gleason: Turkey is the latest nation to announce that they will repatriate their gold, joining a number of other countries who have declared they will do the same. What does this say about the confidence in the system, and then what do you think these countries are positioning themselves for? Basically, why are they doing this?

Marc Faber: Well, I think the question should be: why did they actually hold gold in the U.S.? I personally think that, to hold your assets that are like a safe-haven, in another country is a risk by itself… so I understand all these countries. And secondly, I think for the first time in Bretton Woods, we have less confidence or less faith in the U.S. dollar as a reserve currency. I think the U.S. policymakers, especially the Neo-cons, had the talent to antagonize Mr. Putin and also Mr. Xi in China.

By doing that, they have actually managed to get them closer into an economic and political alliance. And the goal of these two countries, Russian and China, is probably to gradually move away from a dollar system. I’ll tell you, I personally, I’m not a U.S. citizen, I’m just an international observer of economic, financial, and political trends. I cannot imagine a foreign policy that would be worse for the U.S. itself than what the Neo-cons have engineered. I just can’t imagine.

Mike Gleason: Yeah, that’s a very fair point, there. Speaking of oil and the petrol dollar, oil prices have been moving up steadily for a while now. Do you envision a broader commodity rally taking place here, and then maybe could that benefit precious metals in the long run?

Marc Faber: Well, a lot of industrial commodities have been rallying because of commodities-related circumstances, like aluminum rallies because of the trade embargo against Russia, and so forth. But if I look at industrial commodities, I rather have the feeling that they will come down. Why? I think the increase in interest rates in the U.S. on the 10-year treasury note from 1.38 percent in the summer of 2016 to the current level of over three percent, in other words, we more than doubled in the yield in the bond market. And for the two-year treasury, we have been going up between 10 and 20 times depending how you measure it.

I think these interest rate increases will slow down the U.S. economy, and probably bring about a recession.

Mike Gleason: We talk a lot about the appetite for gold in other parts of the world. Do you ever see the tide changing when it comes to the importance of gold ownership? We know Asians are buying it relentlessly and so are many folks in Europe. On the whole that mindset definitely hasn’t made it here to the U.S. yet, but do you sense that may be coming, and if and when it does, do you foresee any problems with being able to get the physical metal once the masses do finally decide to pour into it as the ultimate safe-haven?

Marc Faber: That’s a good question. We had a total neglect of gold and other commodities in 1999, and then gold rose from $255 to a peak in September 2011 of $1,921. At that time, there was a lot of speculation in gold and in other precious metals and other commodities. And since then we’ve been at a bear market until December, 2016, when gold approached $1,000.

Since then, as you know, we’ve been up something like 30 percent, and it is true, there is some speculative interest in gold, but nothing compared to crypto-currency. People that look for an alternative to paper assets like bonds and equities, they’re all gambling on cryptos. I don’t think that cryptos are safe. Now they may move up and they may move down but I, as an investor for the ultimate crisis, I prefer to be in physical precious metals, gold, silver, platinum.

I think, eventually, these precious metals will come back into the investment portfolios of major institutions and individuals. The major institutions of the world, they hold practically no gold. They have more money in Apple, they have more money in Amazon, than, say, in gold. And I think that will change over time, but I don’t know whether it will be tomorrow or in three years’ time, but my view would be that if you really look at the financial situation, the unfunded liabilities, the government deficit, the inflated asset prices, the conclusion is central banks will have to continue to print money, otherwise the system collapses. That, in my opinion, will boost precious metals prices.

Mike Gleason: As we begin to close, here, Dr. Faber, one of the things we value most about your perspective is that you don’t live in the U.S. More than most people, you’re tuned into what’s happening elsewhere, particularly in Asia and Europe. As for Americans, they can’t seem to get their eyes off the political theater in Washington, and to be fair, there’s never been a show quite like the one we have today, but is there anything of note that Americans are overlooking, and what stories are you going to be watching most closely as we move throughout the year?

Marc Faber: Well, I don’t want to criticize the U.S., because in other countries it is not much better. But the one thing I want to say is the following: Americans have been growing up and they’ve been brainwashed that America is a superpower and they have been educated in the belief of the American exceptionalism. And I just want to say that lots of countries in this world have a different perspective of the world. In particular, if you look at China, it has four times the population of America. Its industrial production is larger than in the U.S., their land mass is larger than the U.S., and they’re growing at a much faster pace. They have, in my opinion, no territorial ambitions, but they don’t want to be controlled by the U.S. that has, in Asia, countless military and naval bases.

They (China) look at the world from their perspective, and the U.S. would do well to consider other leaders’ perspectives, including Xi Jinping and Mr. Kim Jong-un, and Mr. Putin, of course. But if you only look at the world from your perspective, undoubtedly some trouble will arise. And what most Americans don’t see, they have kind of a tunnel vision where the tunnel starts in America and looks at the whole world, whereas other countries, they have another view of the world than the U.S.

And I think it’s very important, both economically and politically to consider the point of view of other countries that, by the way, have become very powerful.

Mike Gleason: Yeah, very well put. We’ll leave it there, and Dr. Faber, thanks so much for your time and for staying up late with us today in your home in Thailand. It was a joy to speak to you again. Before we let you go, please tell people how they can subscribe to The Gloom, Boom and Doom Report so they can follow your great commentaries on a regular basis.

Marc Faber: Thank you very much. I have a website called www.GloomBoomDoom.com. There, they can choose either a printed version of The Gloom, Boom and Doom Report or the website report, or both.

Mike Gleason: Excellent stuff. Once again, it’s been a real privilege to speak to you, Dr. Faber, and I hope we can do it again in not too distant future. Thank so much for joining us.

Marc Faber: It was a pleasure talking to you and to your listeners. Thank you.

Mike Gleason: Well, that will do it for this week. Thanks again to Dr. Marc Faber, editor and publisher of The Gloom, Boom and Doom Report, again the website is GloomBoomDoom.com be sure to check that out.

Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.

Article first published on the Sharps Pixley website, and lightly edited here, looking at the strong performance of gold over the past week, but also the weakening of the U.S. dollar index.

Since Donald Trump assumed the Presidency of the world’s richest and most powerful nation, the US dollar index (relating the dollar to a basket of other currencies) has fallen by around 11% accounting for much of the increase in the gold price in US dollar terms. By contrast, the gold price in Euros has actually fallen by 1% over the past year, so what may appear to have been an appreciation in the gold price has been more a reflection of the depreciation in the value of the supposedly mighty US dollar. It’s only that most people around the world look primarily at movements in the gold price in the US dollar – as we do in the title of this article – that the gold price is seen as actually having advanced.

But gold in US dollar terms does provide a useful benchmark as over time the dollar is probably the world’s most stable currency and is, for most nations, their primary reserve currency in their foreign exchange holdings.

This relationship between gold and the US dollar, with the former providing perhaps the most overt indication of how the greenback is doing vis-à-vis other currencies is the reasoning behind what seems to be an ever-increasing view that the powers-that-be collude to suppress the gold price to hide what is an overall indicator in the decline of the dollar’s purchasing power.

Some put this decline at upwards of 80% since President Nixon severed the convertibility of the dollar for gold to protect US gold reserves. In some sectors of the economy this decline is readily apparent. Grocery shopping, property prices, salary levels etc. In others less so, notably transportation and electronics, but in general $100 today would only buy you a fraction of what you could have purchased with $100 in 1971.

But it’s not only the purchasing power of the dollar which has been in decline. The same is true of virtually any nation’s currency. All currencies nowadays are fiat in that they have no backing, which is why some economists call for a return to a gold standard. This is probably impractical without a massive gold price increase and, even then, would probably be overrun very quickly by ever increasing consumer demand for goods and services.

There is also talk of China trying to introduce some kind of gold backing for the renminbi (yuan) at some time in the future thereby leapfrogging the dollar as the world’s go-to currency, but this is probably more a theory than a likely eventuality. It is seen as the reason China is assumed by many to be building its gold reserves at a far higher rate than it has been reporting, but this may also, if true, be just as support for a future petro-yuan – with the yuan exchangeable for gold – as a very competitive Chinese bid to replace the petrodollar!

So perhaps gold investors should treat the latest rise in the gold price purely as a wealth protection exercise. That is what gold is good at over time. If the dollar declines further then gold will rise further, as will all the major precious metals – and most other commodities too. Changes in prices over the 47 years since President Nixon stopped dollar convertibility are self evident, but in geographic areas like Europe where currency purchasing power has diminished similarly the imposition of a new currency, and/or the implementation of other changes like decimalisation in the UK, have made direct comparisons that much harder for the peerson in the street to relate to.

But regardless, gold has moved up sharply in dollar terms in the past few days despite mixed economic data out of the USA. Much of this increase so far seems to have passed silver by and the gold:silver ratio has actually risen a little standing at close to 78 at the time of writing, although silver has been making a bit of a late run ahead of the weekend as have platinum and palladium.

We still stand by our forecast that the gold:silver ratio will come down to 70 or lower during the course of the year which would make silver potentially a better investment than gold if it does follow its historic pattern and rise faster than gold when the latter is on the increase. At the moment we see no reason to change our forecast for gold to hit $1,425 or thereabouts this year and silver $20.50. As I stated in the article in which I made these predictions- Precious metals price predictions for 2018 – gold, silver, pgms– I look at these forecasts as being conservative and if the dollar continues to fall and precious metals prices to rise sharply. as they have this past week, then I may see the need to adjust the forecasts – at least in US dollar terms. However, also bear in mind that gold and silver had a strong start in 2017, but then tended to pull back. 2018 could see a repeat of this pattern, although I don’t see palladium making the kind of gains it did last year.

For those interested in my precious metals stock price forecasts for the year ahead do look at a series of articles i have published on Seekingalpha.com.

The terms and conditions for publication of articles on Seeking Alpha prevent me from posting them here, but follow the links to read them on that site.

While in New York last week, I had the privilege of seeing many colleagues face-to-face. It’s always a pleasure for me to be able to talk gold with industry friends and experts. One stop during my trip that I thoroughly enjoyed was to chat with Pimm Fox and Lisa Abramowicz on Bloomberg Radio. Our discussion was dynamic as always and I shared with them my outlook for gold in the second half of the year, along with the opportunities I continue to see with royalty names.

I still find it curious that many investors don’t realize what a significant role royalty and streaming companies play in the mining business.

Last year I wrote about some of my favorite royalty names, and how I came to know about this business model in the gold mining industry early in my career. If you haven’t read that blog post, I encourage you to go back and explore the groundbreaking work done by Seymour Schulich and Pierre Lassonde, the two founders of Franco-Nevada.

I think that now is a good time to take another look at royalty companies. Here are the top six things I believe investors should know about this specialized sector.

1. What Is a Royalty Company?

Royalty companies, sometimes called streaming companies, serve a special role in the mining industry. Developing a mine property to start producing gold or other precious metal is an expensive, often time-consuming process. Infrastructure needs to be built out, permits applied for, laborers hired and more.

A royalty company serves as a specialized financier that helps fund exploration and production projects for cash-strapped mining companies. In return, it receives royalties on whatever the project produces, or rights to a “stream,” an agreed-upon amount of gold, silver or other precious metal.

2. Many Gold Royalty Companies Have Still Been Outperforming Gold

When looking over the last 12 months, many of the royalty companies have outperformed gold. While this is indeed remarkable, it is important to remember that royalty companies do have a robust business model. Their ability to generate revenue in times when the gold (or other precious metal) price is both rising and falling is what makes them attractive.

3. Remember Real Interest Rates

There’s no question that the gold price is volatile, and in any given 12-month rolling period, historically it’s not unusual for the price of the yellow metal to fluctuate up or down by 20 percent. It’s important for investors to remember that gold historically shares a strong inverse relationship with real interest rates. You can see in the chart that as rates rise, the price of gold falls, and vice versa.

This is another reason why I like the royalty model. Since royalty companies set fixed, lower-than-market prices for mining output, they can better manage the volatility that is inherent in the gold market. For example, Wheaton Precious Metals’ 19 agreements in 2016 entitled the company to buy silver at an average price of $4.42 an ounce and gold at $391 an ounce.

4. Speaking of Revenue

Last time I wrote about these companies, I shared with you that the three big royalty names boast impressive sales per employee. This is still true. Take a look at the 12-month revenue per employee of Franco-Nevada, Royal Gold and Wheaton Precious Metals. Wheaton has only around 30 employees, but has one of the highest rates in the world, generating $25.8 million per employee. By comparison, Newmont, which employs around 30,000 people, generated $310,000 per employee during the same period. Barrick also falls short by comparison.

5. Friendly to Shareholders

Paying dividends is important to investors, as it reflects the health of a company in terms of its cash flow and profits. Even more favorable in the eyes of investors is a company that is growing its dividends. Between 2012 and 2017, royalty companies had a combined annual dividend growth rate of 17 percent. Compare that to 11 percent growth for the S&P 500 Index, and as low as negative 23 and negative 32 percent for global and North American precious metal miners.

In fact, 2017 marks Franco-Nevada’s 10th straight year of dividend increases since the company went public in 2007.

6. Less Reliance on Debt

Royalty companies are better allocators of capital than some of the biggest gold miners. Take a look at Newmont Mining, which has a 43 percent debt-to-equity ratio, and Barrick has a massive 91 percent. By comparison, many of the royalty companies have much lower debt, and Franco-Nevada has zero debt. This history of profitability and fiscal discipline is one of the main reasons I find royalty companies so attractive.

It was no fun investing in precious metals for most of 2011-2015, but the past few months have sure been a blast for buy-and-hold investors. Silver prices are up 22.5% year to date, and gold isn’t far behind.

Now that there are some profits available to take, some metals investors wonder if they should grab them. The answer for most people is not yet — not even close.

Yes, there are gains. But the real question for investors isn’t whether or not there are profits, it’s whether there are better options for their investment dollars. What other assets have a better risk/reward profile? Cash? Stocks? Bonds? No thank you!

Central planners at the Federal Reserve and perma-bulls on Wall Street keep telling us the world is fixed, but a whole lot of us aren’t buying it. The focus remains on picking the right safe-haven asset for what promises to be volatile times.

And picking it ahead of the crowd means positioning yourself for profits as other investors flock to safety behind you.

The U.S. stock market is just a pinch below all-time highs. Current stock prices have less to do with corporate profits and more to do with bubbles and inflation. The price-to-earnings ratio across the S&P 500 index has only been higher on a handful of occasions. And each time, a high PE ratio was a signal for investors to sell, not buy.

Investors might consider the traditional safe-haven alternatives to precious metals – cash and bonds, particularly U.S. Treasuries. Unfortunately, there are no bargains in those markets either. Bond yields are near historic lows, and cash still yields next to nothing.

Not to mention that government and central bank policy which is hell-bent on creating inflation makes any bet on these paper assets a guaranteed loser over time.

Today, the U.S. government carries more than $100 trillion in combined debt and entitlement obligations, and the meter just continues to run. Almost no one expects politicians to eliminate deficits or cure the metastasizing growth of programs such as Social Security or Medicare.

You Are Being Targeted for “Financial Repression”

Officials have clearly signaled their preferences when it comes to dealing with these obligations: devalue the dollar and suppress interest rates. This is also known as “financial repression,” a condition where savers are punished with negative real rates of return.

Until that changes, investors should avoid holding a large amount of U.S. dollars or, even worse, fixed-rate debt. Now is the time to favor bullion and other tangible assets instead.

If another asset appears better positioned to deliver capital preservation or if the risks to capital fade, it will be time to sell some of your physical gold and silver. For now, the risks are extreme, and most other options look awful.

Here are a few signs which would signal it is time to lighten up on precious metals:

An end to permanent deficit spending. Our government has been consistently spending more than it collects in taxes for decades. With every dollar borrowed comes additional incentive to stay the course on dollar devaluation, the preferred long-term strategy for dealing with suffocating debt repayment and overwhelming entitlement obligations.

A Dow:gold ratio of 5:1 or less. At the climax of the last secular bull market in gold in 1980, one ounce of gold could buy one theoretical share of the Dow Jones Industrials. Right now, it would take 14.6 ounces of gold. As the precious metals bull market resumes, history tells us that gold (and silver) will outperform the general stock market by many multiples. Of course, everyone must assess the situation for themselves, accounting for their own personal circumstances. Individuals may find good reasons to sell metals and raise cash; an emergency, buying a home, etc.

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About the Author:

Clint Siegner is a Director at Money Metals Exchange, the national precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.

Precious metals banked another solid week of gains as investors looked for alternatives to the stock market and U.S. dollar. Both gold and silver pushed through important technical resistance levels. Metals bulls hope to see markets enter a virtuous cycle; improving charts followed by more speculative long interest leading to improved charts.

There is some evidence this may be happening.

TFMetalsReport.com reports the inventory of the largest exchange-traded gold fund (GLD) bottomed in December. It has since rallied sharply as 1) speculators are buying shares in the ETF in volume and 2) GLD “authorized participants” — mostly bullion banks — are covering short positions.

The U.S. equity markets will command most of the focus this week as trading continues to be volatile. The S&P 500 has fallen back to just above key support level in the 1,850 range. If support fails, we’ll have an interesting week.

One wonders if the U.S. can be far behind should economic data continue to disappoint. Former Fed chairman, Ben Bernanke, expects our central bank to add negative rates to the tool kit for fighting recession. And Bloomberg reported that the odds of negative rates, while still relatively small, are rising.

Reasons to Be Cautiously Optimistic on PRECIOUS Metals

Precious metals markets are picking up steam. Last week’s price performance was the best we have seen in months and both gold and silver broke through some important overhead resistance levels. The weekly gains stacked on top of the very strong showing in January. So where do we go from here?

Metals prices are riding higher primarily based on two drivers; fear and the Federal Reserve. Let’s take a look at both for clues about what to expect in the coming months…

It looks increasingly like the world economy is headed for trouble. Fear may be on the rise. Investors are grappling with some pretty lousy economic data, and last week was no exception. The ISM Manufacturing Report showed the fourth straight down month for factories, and the biggest drop in manufacturing activity in more than a year.

Even more problematic, Chinese manufacturing hit a 3-year low point, and the outlook there is grim. The Baltic Dry Index — which tracks costs of ocean freight for commodities such as grains, base metals, and coal — dropped to its lowest level ever last week. Demand for raw goods globally continues to sink.

Main Street America was hit with announcements totaling more than 75,000 planned layoffs in January — 42% more than the same month last year. The retail sector is particularly hard hit. Wal-Mart announced it will close 269 stores globally and 16,000 people will lose their jobs. Macy’s expects to cut nearly 5,000 from its payroll.

But retail certainly isn’t the only sector struggling. Job losses in the oil and gas sector are huge, and Caterpillar recently announced plans to close 4 plants in the U.S. and China.

American consumers are responding to the recent bad news. The key Personal Incomes and Outlays report published a week ago revealed they are battening down the hatches — spending less and saving more.

Wall Street is also feeling the pain. The market for high yield “junk” bonds is deteriorating. Lenders, desperate for better yield in a world dominated by artificially low interest rates, aggressively loaned money into volatile sectors such as oil and gas. Much like the collapse of subprime home lending in 2008, it looks as if those bets may go bad.

In fact, markets are dealing with increasing fears of default everywhere. Risk is jumping significantly for some of the world’s largest banks. The cost to insure the debts of many of these behemoths via credit default swaps spiked massively in recent days.

Virtually all of these institutions are larger than Lehman Brothers. Should even one of them collapse, it will likely be much more difficult to contain the chain reaction that follows.

Fear looks likely to persist and may even accelerate in the coming months. Thus far in 2016, precious metals have been big beneficiaries as investors look for safe havens. That’s an encouraging sign given gold and silver futures missed getting much safe-haven buying the last time the economy slid toward recession in 2008 — at least initially.

With regards to Fed policy, officials there want you to know their decisions are “data dependent.” Lately the S&P 500 seems to be the data they care most about. Just a few weeks ago the consensus was for four additional rate hikes in 2016. Since then the S&P 500 has dumped nearly 10% and the official Fed-speak, as well as the consensus for further hikes, completely reversed.

The next FOMC meeting is in March. Odds are we will see officials become even more dovish between now and then. If that occurs we can expect even more weakness in the U.S. dollar and strength in precious metals.

It is important to note that if we get a major shock in the markets — akin to the collapse of Lehman Brothers in 2008 — then all bets are off with regards to metal prices. As happened then, traders may initially be forced to sell precious metals futures along with just about everything else to raise cash and cover margin calls.

This time around, however, metals are at a cyclical low with all speculative money having already been completely flushed out. So far, so good.

* Clint Siegner is a Director atMoney Metals Exchange, the national precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.

A few legendary influencers in investing are making huge bets right now on commodities, an area that’s faced—and continues to face—some pretty strong headwinds. What are we to make of this?

I already shared with you that famed hedge fund manager Stanley Druckenmiller made a $323-million bet on gold, now the largest position in his family office fund. It’s also come to light that George Soros recently moved $2 million into coal producers Peabody Energy and Arch Coal. Meanwhile, activist investor Carl Icahn took an 8.5-percent position in copper miner Freeport-McMoRan, which we own.

My friend Marc Faber, the widely-respected Swiss investor and editor of the influential “Gloom, Boom & Doom Report,” is now plugging for the mining sector and precious metals. Speaking to Bloomberg TVlast week, Faber claimed that investors are running low on safe assets and suggested they revisit mining companies:

If I had to turn anywhere where… the opportunity for large capital gains exists, and the downside is, in my opinion, limited, it would be the mining sectors, specifically precious metals and mining companies… like Freeport, Newmont, Barrick. They’ve been hammered because of falling commodity prices. Now commodities may still go down for a while, but I don’t think they’ll stay down forever.

Late last month, Freeport became the first major miner to announce production cuts in response to depressed copper prices, which have slipped around 19 percent since their 2015 high of $2.95 per pound in May. This reduction should remove an estimated 70,000 tonnes of copper from global markets, according to BCA Research, and eventually help support prices.

Platinum and palladium miners in South Africa, a leading producer of both metals, also announced job cuts and mine closures, as platinum has slipped more than 16 percent this year, palladium a quarter.

But Marc sees opportunity, as I do. In my keynote speeches earlier this year I suggested that 2015 would see a bottom in cost-cutting due to divesture and slashing of capital expenditures, and that in 2016 we should see higher returns on capital.

Furthermore, using our oscillators to measure the degree to which asset classes are overbought and oversold, we find that commodities are extremely oversold right now and currently bouncing off low negative sentiment. The smart money is buying.

When asked if he thought commodities had reached a bottom, Marc had this to say:

I would rather focus on precious metals—gold, silver, platinum—because they do not depend on industrial demand as much as base metals and industrial commodities.

Marc was referring, of course, to China, the 800-pound commodity gorilla, as I’ve often described the country. The Asian powerhouse is currently responsible for nearly 13 percent of the world’s commodity demand, followed by the U.S. at a little over 10 percent.

But as I discussed recently, China is transitioning from a manufacturing-based economy to one that emphasizes services, consumption and real estate. Commodity demand is cooling, therefore, and we can expect it to cool even further. Aside from the strong dollar, this is one of the key reasons why prices have plunged to multi-year lows.

Commodities Seeking an Upturn to Global Manufacturing

The JPMorgan Global Manufacturing PMI continues to decline as well. Since its peak in February 2014, the reading has fallen 4.5 percent. The August score of 50.7, just barely indicating manufacturing expansion, is the sixth consecutive monthly reading to remain below the three-month moving average.

I’ve shown a number of times in the past that when this is the case—that is, when the one-month reading is below the three-month trend—commodity prices have tended to trade lower. Unlike other economic indicators such as gross domestic product (GDP), the PMI is forward-looking and helps investors manage expectations. Based on our own research, there’s a strong probability that copper and crude oil prices might dip three months following a “cross below.”

The opposite has also been true: Prices have a stronger probability of ticking up three months after the one-month crosses above the three-month.

This is why we believe prices will have a better chance at recovery after the global PMI crosses above its three-month moving average.

I have great respect and admiration for Druckenmiller, Soros, Icahn and Marc—all of whom are clearly bullish on commodities—but we would prefer to see global manufacturing growth reverse course.

In the meantime, low commodity prices are a windfall for many companies in Europe, Japan and the U.S. Metals and other raw materials are at their lowest in years, which is the equivalent of a massive tax break for the construction and manufacturing sectors.

Low gold prices are also expected to generate high demand in India as we approach fall festivals such as Diwali and Dussehra, not to mention weddings. According to estimates from Swiss precious metals refiner Valcambi, demand could reach 950 tonnes by the end of the year, compared to 891 tonnes in 2014.

Apologies for the apparent dearth of gold and precious metals articles from me published here this week. Its not that I haven’t been writing – I have – but most of my work in the past week has been going direct to Mineweb – my main source of income – so you can still read my thoughts and comments on what’s happening in gold and silver – and sometimes in other metals too – (notably platinum in the past week) so you can always read them there.

Here follow links to some of my recent Mineweb articles. I’d hate to deprive you of my thoughts however obscure they may be! Apologies if you have already read all or any of them

Gold is teetering on making a significant breakthrough through the $1300 level but there could also be some adverse factors which could bring it back down again. Another post submitted to Mineweb.com for publication on that site.

Lawrie Williams

While gold breached the $1300 level in overnight trading last night this is obviously way too early to call this the start of a consistent gold price uptrend, although it is obviously a very encouraging start to the year for gold bulls recently enhanced by the Swiss national Bank’s decision to drop the Swiss franc’s peg to the Euro. The question now facing us is whether or not a sustained breakthrough can be achieved. At the time of writing the price had fallen back into the high $1290s but was again testing the $1300 level.

The European Central Bank (ECB) is widely anticipated to announce that it is to implement a Quantitative Easing programme and buy government bonds to try and help stabilise the Eurozone economy at its meeting tomorrow. But apart from some kind of knee-jerk reaction when the decision to do so, or kick the can further down the road, is announced we don’t see this having any serious price impact given many of these factors have already been taken into account in the recent gold price advance anyway. Either way the Eurozone continues to have significant problems.

Greek elections come up on January 25th. Opinion poll figures suggest the outcome is probably still too close to call, but there is a real chance that the anti-austerity, and anti-EU Syriza party may well win – but whether it might win by a sufficient majority to hold power on its own is much more uncertain. The latest opinion polls put Syriza as gaining more ground and now ahead by between 4 and 6.5%, but whether this lead is sufficient to give it an outright majority should it win – even with the extra 50 seats in parliament given to the winning party to help it form a government under the Greek system – is far less certain. Pundits put it a few seats short of an outright majority should this be the case. While Greek public opinion appears to support many of Syriza’s proposals, particularly those in cutting back the current austerity programmes and reneging on the country’s debt, it also appears to favour remaining in the Eurozone and worries about that may prompt a last minute swing to the longer-established political groups and yet deliver victory to the incumbent New Democracy party and its allies.

What is particularly significant about the Greek elections, though, is that if Syriza does win it could send shockwaves through the whole of the Eurozone. Many countries have seen the rise of ‘alternative’ political parties – not least in the UK (UKIP) and France (Front National). Britain’s highly regarded Economist Intelligence Unit points to the rise of these alternative ‘populist’ parties as having the potential to create substantial changes to voting patterns – it also cites Denmark, Finland, Spain, Sweden, Germany and Ireland as having spawned political parties which could lead to unpredictable results in their next electoral polls. A Syriza victory would likely give a significant boost to these other populist options and potentially lead to major political instability throughout Europe and the break-up of the single currency, if not the EU itself.

Political instability is, of course, manna for the gold bulls as people rush to buy the precious metal as providing some form of stability as it virtually always has in the past.

Taken with continuing strife in the Ukraine, with major potential still for destabilising escalation which could spread to other former Soviet countries, and the huge political and military impact of fundamentalist Islamic groups in the Middle East with potential to spread to North Africa, and now also in West Africa with Boko Haram, the world is beginning to look increasingly fragmented – all positive for gold.

But there is near-term downside risk for gold too, as pointed out in the latest Precious Metals Weekly newsletter from specialist analysts, Metals Focus. The group believes that the recent positive factors are all temporary and expect that the upturn in gold will eventually lose its momentum.

Looking beyond the positive euphoria of the past few weeks, Metals Focus sees three major headwinds develop for gold, likely in the second half of the quarter. First, it is likely that US interest rate expectations will return with a potentially adverse impact on gold in North America in particular. Second, Eurozone concerns should probably wane. Third, the current strength of physical demand, fuelled by pre-Chinese New Year buying, will eventually subside. Should these three factors indeed concur, the consultancy believes that investor sentiment towards gold will quickly evaporate. They stress that their field research so far suggests little conviction by institutional players that there is a genuine change in trend for the price and that recent positioning favouring gold seems to be mostly opportunistic rather than strategic.

So, as usual, the path of the gold price is perhaps impossible to call with so much depending on often unpredictable geopolitical events to give it the occasional upwards or downwards spurt. The fact that the first three weeks of the current year have seen a plethora of events and market activities which have largely benefited gold so far does suggest that we are going to see a turbulent year ahead which will likely provide, at various stages, both upwards and downwards pressures on precious metals prices. Where this will leave them in 12-months time is anybody’s guess although we would err on the positive in our own predictions.

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London – recently described as the World’s No. 2 University (after MIT).

He has worked in mines in South Africa (gold, uranium and platinum), Canada (uranium), Zambia (copper) and U.K (coal) and holds a South African Mine Managers certificate. He also worked as a gold mining company analyst for one of the major South African mining houses. He left South Africa to join Mining Journal as Financial Editor and worked his way through that organisation to edit Mining Magazine, and then join the Board. He was Managing Director (CEO) of the company for 13 years up until it was sold in 2001. During part of this period he was also President of Nevada-based U.S. company Mining Media Inc which was publisher of North American Mining magazine.

Following his time at Mining Journal he became editor, and then General Manager, of Mineweb.Com, taking it from lossmaker to becoming highly profitable before taking partial retirement in 2012. Since then he continued to write for Mineweb up until September 2015, and now writes for other organisations including Sharpspixley.com as contributing editor, Seeking Alpha and for Johannesburg Stock Exchange special supplements and his articles are picked up and linked to by numerous websites around the world. Again these articles mostly concentrate on precious metals markets and mining.

LawrieOnGold.com has been set up as a vehicle to publish articles by Lawrie Williams not published elsewhere and will also link to some of his other articles. It will also include contributions from other selected specialist writers as well as links to other carefully chosen articles of interest to those interested in the precious metals sector.

Precious metals bulls have been calling a gold and silver price bottom throughout the recent years of price declines. Will they be correct this time around?

LONDON

At the recent Mines & Money conference and exhibition In London there was a perhaps surprisingly upbeat feel given the poor performance of metals prices over the preceding 2-3 years. While this optimistic mood seemed to apply to precious and base metals producers alike, as is the norm nowadays it was the gold companies which were looking for the biggest upside. Perhaps this was because those that can nowadays afford to participate in an event like this – it is expensive to exhibit and to attend – are those who are going to survive in the current price environment come what may. But perhaps even more prevalent was the perceived view that things were at last truly bumping along the bottom and that the only way forward was up.

There are a lot of factors supporting this latter viewpoint, but it’s probably just as well for the bulls out there not to get too carried away as many of these bullish factors have been around before and still prices have continued to be driven down. But this time perhaps the optimists do have a point.

On gold and silver demand, this appears to be riding high. Chinese Q4 demand as represented by Shanghai Gold Exchange withdrawals has been just as strong as it was in the 2013 record year. True demand had slipped pretty badly in Q2 and Q3 compared with a year earlier, but it has staged a huge pick up since the end of September. But perhaps even more significant has been India’s return to the gold buying spree with November gold imports officially put at 150 tonnes, although some assessments had even suggested it might have been as high as 200 tonnes….